Encana Prepares Share Issue To Fund Permian Oilfield Development

Canada’s Encana is preparing the placement of up to 107 million shares of new common stock to fund the development of an oilfield it operates in the Permian. The issue was priced at US$9.35 each after a speedy marketing campaign, a discount compared to the company’s closing price from yesterday – US$9.87 (C$13.03), at which it would have raised around US$1.06 billion (C$1.4 bln).

The issue is fully underwritten by Credit Suisse and JPMorgan, which will have a 30-day option for buying a further 16 million shares after the completion of the initial placement.

Encana said it will use half of the proceeds to double the number of wells it operates in the Permian by the end of 2017 by adding more drilling rigs. The rest of the money will be used to pay down debt.

The Canadian energy major has a debt of around US$5.7 billion, and earlier this year its credit rating by Moody’s was reduced to junk status, with the ratings agency citing excessive leverage. This share placement now is considered by some observers to be a bold move in the still uncertain oil market environment.

Most forecasts for a market rebalance, including from the International Energy Agency, suggest the glut will persist well into 2017. On the other hand, however, the Permian shale play has become the focus of much attention in recent months despite low oil prices. This attention has come not just from energy companies but also private equity firms, including Blackstone and W.L. Ross & Co.

The reason the Permian is so attractive is that it’s a low-cost producing region, and many of the wells in it have remained profitable even at the current price levels. Energy companies with a presence in the Permian are focusing most of their capex on it, and newcomers are buying big to take advantage of the favorable production cost conditions in the play.